'Informal sector, source of tax revenue'

HARARE - Former banker and immediate past chairperson of the Zimbabwe Investment Authority, Nigel Chanakira said the country’s economy had largely gone informal and thus represents a potentially significant source of tax revenue for the cash-strapped government.

Speaking at the Financial and Economic Rejuvenation Indaba, host by Global Renaissance Investment last week, Chanakira said, the informal sector formed a large and growing share of gross domestic product and should not be ignored under the prevailing economic environment.

“The country’s economy has gone informal…We have a strong informal sector that is not taxed, the recently gazetted two percent tax is significant in drawing revenue even in this (informal) sector if it’s narrative is property presented. If there are a lot of questions around the two percent as is the case now it will not go well for both parties,” Chanakira said.

The Indaba was held under the theme ‘Towards a financial and Economic Transformation to achieve the 2030 vision’.

Government is reportedly still trying to come up with effective means to make sure the informal sector, which is undoubtedly now the biggest employer, can contribute to the fiscus through paying taxes. 

Chanakira said the performance of the informal sector had a major impact on the performance of the wider economy. Zimbabwe’s economy is projected to grow by 3,1 percent in 2019, which is lower than the 2018 anticipated growth of 4 percent.

Government has also since acknowledged the growth of the informal economy, which former finance minister Patrick Chinamasa described as the “new economy” in his last budget presentation. 

The country’s economy heavily informalised in the past 15 years as Zimbabwe went through severe economic challenges that saw major formal businesses closing shop or relocating.

According to the International Monetary Fund, Zimbabwe has the second largest informal economy as a percentage of its total economy in the world, after Bolivia. 

In a working paper titled, Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? in which 158 economies were studied, Zimbabwe, with a score of 60,6 percent, came second to Bolivia which topped at 62,3 percent.

Switzerland with 7,2 percent and Austria at 8,9 percent, were among the lowest in the world.

The IMF admitted that shadow economies, which are known by various names around the world, among them hidden economy, grey economy, black economy or lack economy, cash economy or informal economy, were difficult to measure.

“The shadow economy includes all economic activities which are hidden from official authorities for monetary, regulatory, and institutional reasons,” the IMF said.

Activities of shadow economies were hidden from authorities for various reasons which include regulatory, monetary and institutional, the international financial institution said.

Monetary reasons, the IMF said, included avoiding paying taxes and all social security contributions while regulatory reasons include avoiding governmental bureaucracy.

However, some analysts say despite Zimbabwe’s informal sector not falling under the ambit of the tax man, it indirectly contributes some significant amount to the fiscal revenues through Value Added Tax (VAT).

They argue that given that the informal sector employs a significant amount of the people who are supporting the majority of the households in the country their purchasing activities of the various household consumables and capital goods significantly contribute to VAT.

In most circumstances the formal sector sources its inputs from this sector which allows them to increase their production and resultantly amount of tax in the form of corporate tax, pay as you earn, value added tax among other taxes paid by the corporate world. — The Financial Gazette

 

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